Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose that LMN stock currently is selling at $52 per share. You buy 500 shares using $20,000 of your own money, borrowing the remainder of

Suppose that LMN stock currently is selling at $52 per share. You buy 500 shares using $20,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 9%. a. What is the percentage increase in the net worth of your brokerage account if the price of LMN immediately changes to: (i) $56.68; (ii) $52; (iii) $47.32? What is the relationship between your percentage return and the percentage change in the price of LMN? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

b. If the maintenance margin is 25%, how low can LMN's price fall before you get a margin call? (Round your answer to 2 decimal places.)

c. How would your answer to (b) change if you had financed the initial purchase with only $13,000 of your own money? (Round your answer to 2 decimal places.)

d. What is the rate of return on your margined position (assuming again that you invest $20,000 of your own money) if LMN is selling after 1 year at: (i) $56.68; (ii) $52; (iii) $47.32? What is the relationship between your percentage return and the percentage change in the price of LMN? Assume that LMN pays no dividends. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

e. Continue to assume that a year has passed. How low can LMN's price fall before you get a margin call? (Round your answer to 2 decimal places.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Startup CFO The Finance Handbook For Your Growing Business

Authors: Kyle Brennan

1st Edition

1790959403, 978-1790959402

More Books

Students also viewed these Finance questions

Question

b. Predict lichen N for an NO 3 deposition value of .5.

Answered: 1 week ago